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Ally to pay ResCap $2.1B to settle creditor claims

Ally Financial Inc., the auto lender majority owned by the U.S. government, agreed to pay $2.1 billion to avoid lawsuits related to its bankrupt mortgage unit, Residential Capital LLC, according to a court filing Thursday morning.

Under the settlement, Ally will pay $1.95 billion in cash to the ResCap bankruptcy estate, plus $150 million in insurance proceeds. That money will be added to at least $3.5 billion in cash the company has raised by selling its mortgage servicing business and a loan portfolio and eventually distributed to creditors who claim to be owed more than $6 billion under a reorganization plan supported by Detroit-based Ally.

Settling creditors include ResCap noteholder Paulson & Co., MBIA Insurance Corp. and a group of securitization trusts who sued for losses related to bad mortgages. Under the proposed agreement, Ally will also be guaranteed full repayment of the $1.13 billion it claims ResCap owes it, according to a statement Ally released Thursday.

"Reaching this comprehensive agreement enables Ally to turn the page on a tumultuous chapter in its history that was severely impacted by the issues in the mortgage industry," Ally CEO Michael A. Carpenter said in the statement. "Putting these issues behind us is in the best interest of our shareholders, employees and customers."

Bigger settlement

The settlement is more than twice the $750 million that Ally agreed to pay when ResCap filed bankruptcy a year ago. That deal was attacked by unsecured creditors as too low.

The settlement doesn't resolve claims against Ally brought by the Federal Housing Finance Agency and the Federal Deposit Insurance Corp., as receiver for certain failed banks.

ResCap, based in New York, filed for bankruptcy last year, partly to help it resolve lawsuits brought by purchasers of mortgage bonds backed by home loans. The investors claimed the bonds lost value because many of the loans were bad. Such losses account for much of the $25 billion in unsecured debt that the creditors committee claimed ResCap may owe.

Ally's 8 percent bonds due in 2031 fell 1.32 percent to 130.8 cents on the dollar Thursday minutes after the settlement was made public, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

Mediator help

ResCap, Ally and the creditors came to an agreement after weeks of negotiating with the help of a mediator, U.S. Bankruptcy Judge James Peck. On May 13, word of a settlement leaked out after a former bankruptcy judge, Arthur J. Gonzalez, was preparing to make public the results of his investigation into Ally’s pre-bankruptcy relationship with ResCap. The amount of the settlement wasn’t made public until today.

The settling parties convinced the judge overseeing ResCap’s bankruptcy, Martin Glenn, to temporarily seal the investigative report at least until the deal comes before the court for final approval.

Gonzalez, who spent more than $80 million on his investigation, examined claims that Ally exerted so much control over ResCap that the auto-lender could be forced to pay the unsecured debts of its mortgage unit.